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Management

Inventory — The Overlooked Asset

I’m not an attorney nor a CPA, but here are some facts I’ve learned over the years about the Business aspects of Inventory.

It doesn’t really matter what your CPA requires or suggests about your Inventory for your taxes, (they are probably right). Certainly follow their advice and be consistent from year to year.

But, your Inventory is the largest asset your business will likely have. You really should be tracking as much about your inventory and its performance as you can. If it’s just sitting around, its like cash in the mattress.

What is your Inventory ROI? (Gross Profit for a period divided by the average value of your Inventory). A higher return is better use of your cash (or credit.)

What is its turnover rate? (COGS for a period divided by Average Inventory value for the period.) This how many times your Inventory turns over or is consumed and replaced during the period. Higher turnover is better use of your cash (or credit).

What are you doing to improve each of these measures?

As for taxes, IRS Schedule C asks if you have inventory, then requires you do the calculation for COGS. The Small Business Taxpayer threshold for inventory exemption is $25M, not $1M. But, the inventory is only exempted from reporting if you class it as “incidental”. If you are doing anything retail, online, Amazon, or eBay, then your inventory is Not incidental, and must be properly accounted for.

(If you want to change how you do accounting to the IRS from prior years, then you need to submit a form 3115.)

If you haven’t already done so, Calculate your Ending Inventory value.

For Amazon Sellers, Run an Amazon Report / Fulfillment / Inventory / Monthly Inventory History for December for your ending FBA Inventory. Then physically count any of your inventory stored and stashed at home or your warehouse.

Add it all up times the cost of each – This is your Ending Inventory for last year, AND it is the Beginning Inventory value you will use for next. year

The COGS (Cost Of Goods Sold) calculation is very simple.

The value of your Beginning Inventory PLUS the value of your Purchases (of new inventory purchased during the period) MINUS the value of your Ending Inventory is the value of the COST of Goods Sold for section 3 of IRS Schedule C.

Watching your Inventory performance is just as important as managing your expenses, but gets less attention. Stale inventory doesn’t sell well. Paying too much for inventory makes it difficult to be profitable against lower-cost competitors. Inventory in your garage can’t sell. Money invested in inventory can’t be used for anything else.

Inventory is a Big Deal.

What questions do you have about Inventory?
John L

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